The risk of out-of-cycle mortgage rate increases is rising

The RBA hasn’t moved official interest rates since August 2016.

And it is unlikely that the RBA will raise official interest rates in the next year, but that hasn’t stopped lenders hiking rates out-of-cycle.

This week Australia’s fifth largest home loan lender ING has hiked interest rates for existing customers by ten basis points (0.1%.)

ING joins Heritage Bank, Bank of Queensland, AMP, Auswide and IMB in raising variable home loan interest rates over the last week.

As the cost of funding puts a squeeze on banks’ profit margins, some lenders are choosing to pass some of the cost onto borrowers.

While the RBA sets the overnight cash rate, financial markets determine the real borrowing costs for the banks .

Will the big banks follow?

Australia’s big four banks banks may be forced to impose “out of cycle” mortgage rate hikes as global interest rates push higher.

There is speculation they cannot afford the political fallout of raising interest rates while the banking royal commission is underway

RateCity spokesperson Sally Tindall said all eyes are now on Australia’s big four banks who’ve kept a lid on rate hikes so far.

“Banks are weighing up whether they can wear the rising costs, or hike rates and risk customer backlash.

“The Royal Commission has acted like a cop on the beat keeping a lid on rates – but for how long?

“After months of negative press our banks are treading a fine line.

“We’ve seen a handful of smaller lenders hike rates, but so far nothing from the big four. It will be interesting to see how long they hold out.”

 

Out-of-cycle rate hikes – variable mortgages
LENDER	HIKES	DETAILS	DATE
ING	0.10%	Owner-occupier home loans	3-Jul
Auswide Bank	up to 0.13%	Owner-occupier loans up by 0.05%; investor loans and line of credit loans up by 0.13%	27-Jun
AMP Bank	up to 0.40%	All owner-occupier interest-only loans for new customers only up by 0.40%	25-Jun
IMB Bank	0.08%	Standard variable rates for investment & owner-occupiers	22-Jun
Heritage Bank	0.05%	Selected variable home loan products.	2-Jul
BOQ	up to 0.15%	Owner-occupiers principal and interest up by 0.09%; owne- occupiers interest-only up by 0.15%; investors principal and interest 0.15%; line of credit 0.10%	2-Jul
Suncorp	up to 0.12%	Owner-occupier principal & interest up by 0.05%; investors P&I up by 0.08%; interest-only up by 0.12%	28-Mar
ME Bank	up to 0.16%	Owner-occupier principal and interest up by 0.06%; investor P&I up 0.11%;  interest-only up by 0.16%	19-Apr
MyState	up to 0.09%	Owner-occupiers and investors up 0.09%	28-May
Source: RateCity.com.au

 

History of out-of-cycle rate hikes

Until the global financial crisis, retail banks tended to raise or lower their lending rates in line with the Reserve Bank’s interest rate cycle.

 

When the RBA made a cut, so did the banks and by the same amount. When the RBA raised rates, the banks followed suit.

Rate City explain that as a result, the margin between the RBA cash rate and the major banks’ standard variable rates was consistently 1.8 percentage points, while the margin between their discounted variable rates was by and large 1.2 percentage points.

But as the global financial crisis unfolded, the costs of funding started to climb, and Australian banks began to feel the pinch.

In January 2008, the major banks made their first out of cycle rate hike in almost nine years, sending shock waves through the public and resetting the industry standard for how interest rates are set.

It is no longer an RBA-led decision.

Over the last decade we have seen banks make their pricing decisions on a wide range of competing factors, leading to an ever-growing gap between the cash rate and the banks standard and discounted variable rates.